Luna Lighting, a retail firm, has experienced modest sales growth over the past three years but has
Question:
Luna Lighting, a retail firm, has experienced modest sales growth over the past three years but has had difficulty translating the expansion of sales into improved profitability. Using three years' financial statements, you have developed the following ratio calculations and industry comparisons. Based on this information, suggest possible reasons for Luna's profitabilityproblems.
Industry Averages 2009 2009 2008 2007 2.2X 47 days 8.1X 3.3X 1.3X Current Average collection period Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Times interest earned Fixed charge coverage Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity 2.3X 45 days 8.3X 2.7X 1.1X 50%, 8.1X 4.0X 43%, 6.3% 3.5% 2,7% 73% 2.3X 46 days 8.2X 3.0x 1.2X 50% 8.2X 4.5X 43%, 7.2% 4.0% 5.0% 9.% 8.1X 5.5X 43%, 8.0% 4.3% 57% 11.4% 2.1X 50 days 8.3X 3.5X 1.5X 54% 7.2X 5.1X 40% 7.5% 4.2% 6.4% 1 1 .8%
Step by Step Answer:
Lunas current ratio has increased and is above the industry average the average collection period ha...View the full answer
Understanding financial statements
ISBN: 978-0136086246
9th Edition
Authors: Lyn M. Fraser, Aileen Ormiston
Related Video
Inventory turnover is a key metric that helps businesses evaluate the efficiency of their operations. A high turnover ratio is generally considered positive, indicating that the company is effectively selling its inventory and making efficient use of its resources. On the other hand, a low turnover ratio may indicate issues such as overstocking or slow sales and may require further examination to identify and address the underlying causes. Businesses use this ratio to make decisions about inventory levels, production schedules, and pricing strategies. It also helps businesses to identify areas where they may need to make improvements, such as reducing lead times for production or optimizing sales and marketing efforts. Additionally, inventory turnover is used by investors and analysts as a key performance indicator to evaluate the financial health and growth potential of a company.
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